Index Outlook: Stocks on shaky ground

Chart patterns in the Sensex and the Nifty display weakness and the indices can head lower in the short term.

January 11, 2014:

Stocks trudged sideways in a desultory manner last week, making the Sensex and Nifty close with marginal losses. While it is heartening to see stocks holding their ground despite a slew of negative economic releases, the lack of momentum also implies that bulls are doing some serious soul-searching.

Stock prices have been pushed higher in anticipation of a market-friendly government taking charge at the Centre in the upcoming elections. But with the AAP throwing its hat into the ring, the possibility of a fractured mandate has increased. Economic data and corporate results are unlikely to be heartening, at least for the first two quarters.

Against this background, the drop in conviction levels is justified. FIIs are also beginning to turn cautious. They were net sellers in the secondary market in some of the sessions in January. According to EPFR Global, foreign funds have not been bullish on emerging markets in general. Global emerging market equity funds have recorded outflows for 11 consecutive weeks.

The week started on a nervous note, with HSBC Services announcing that India’s Business Activity Index fell from 47.2 in November to 46.7 in December, the sixth consecutive monthly drop in the index. The trade deficit, too, widened, with merchandise exports recording growth of 3.49 per cent over the previous year, down from 5.86 per cent growth in November.

The shocking contraction in industrial production numbers for November will have to be assimilated on Monday morning. A sharp decline in the number of jobs added in the US in December is also of concern, since it casts doubt on the economic recovery in US.

Both CPI and WPI data to be unveiled next week will be of great interest to market participants, especially since the RBI governor has indicated that the forthcoming releases will determine future policy action. Q3 earnings of the biggies, scheduled for announcement next week, will also help to keep investors riveted. With both the RBI and the US Fed slated to meet in the last week of January, market participants could remain edgy.

Oscillators in the daily chart have dipped into the negative zone. But they are moving sideways at lower levels, implying that all is not lost yet.

The point of worry is the deterioration in weekly oscillators. The weekly price rate of change oscillator has dipped below the zero line and there is a sell signal in the weekly moving average convergence divergence oscillator. However, both these signals need to sustain next week for us to conclude that the medium-term trend is reversing lower.

Sensex (20,758.5)

The Sensex moved in a narrow range before closing 93 points lower last week. Down-closes in most of the recent sessions imply that the path of least resistance in the near-term is downward. That the index is moving below its 50-day simple moving average also denotes weakness.

There can be a decline to 20,277 or 19,848 in the week ahead. The presence of the 200-day moving average at the second target will lend critical support. The 38.2 per cent retracement support also helps make the zone between 19,800 and 20,000 an important support to watch out for.

Resistances for the week ahead are at 20,971 and 21,158. A close above the second resistance is needed to mitigate the negative short-term view.

The medium-term view for the index is positive. Index movement above 20,000 will mean that it can oscillate in the band between 20,000 and 21,500 for a few more weeks before the next major move.

Nifty (6,171.4)

The Nifty, too, moved sideways before closing 39 points lower last week. The chart pattern suggests weakness in the short-term. The Nifty could break lower to 6,117, 6,040 or 5,916 in the days ahead. The short-term weakness will reduce only if the index moves above 6,272. Short-term traders can therefore go short in rallies, with stop-loss at 6,280.

A move above 6,280 will mean that the index is heading toward 6,415 and 6,582. The medium-term trend in the index stays positive despite the negative short-term view. The index has critical support around 6,000 and then at 5,925, where the 200-day moving average is positioned. The positive outlook will be threatened only on breach of the support at 5,925.

Global cues

Most global indices closed on a positive note last week. CBOE volatility index declined 1.6 points to close at 12.1, indicating that investors in US were feeling complacent about the sustainability of the rally.

The Dow moved sideways for the most part and closed the week with a 32-point loss. This has resulted in a doji formation in the weekly chart. The two weeks of very narrow moves imply that the index is losing momentum in the medium-term. The short-term view will, however, stay positive as long as it trades above 15,650. Medium-term support that needs to be watched is at 14,720.

Many Asian indices, such as the Hang Seng, KLSE Composite, Philippines PSE Composite Index and Shanghai Composite Index, closed the week in the negative.

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